Marginal Rate of Substitution (MRS) is the rate that an individual is ready to give up from "good A" to obtain one or more unit of "good B" while keeping the overall utility constant. In other words, MRS reveals how many units of good x that an individual is ready to give up to gain extra unit of good y while keeping the same level of utility constant. The MRS involves the trade off of goods to change the allocation of the total bundles of goods while maintaining the level of satisfaction. Typically, MRS is calculated between goods being placed on indifferent curve. The product of cheeseburger and hotdogs is used to illustrate the MRS. If the marginal rate of substitution of cheeseburger for hot dogs is 2, thus, consumer will be willing to give 2 cheeseburger to obtain 1 extra hot dog.
However, marginal rate of substitution diminishes as consumer substitutes one product for another. The law of marginal rate of substitution states that there is a decline in the MRS as an individual moves down on the standard convex-shaped curve. Typically, the MRS diminishes over time because it is subject to diminishing marginal utility. The more units of goods consumed the less additional satisfaction that each additional goods creates. In other words, the more an individual consumes a particular good, the more he will be willing to substitute the good. For example, an increase in the consumption of tea will lead to a decline in the marginal utility of coffee.
The data in the Table 1 are used to explain the reason marginal rate of substitution diminishes as a consumer substitute's one product from another.
Table 1: Marginal Rate of Substitution
MRS of X for Y
From the table 1, it is revealed that when a consumer moves from 4th to 5th combination, his or her the MRS of good X for good Y declines to one (1:1).
Price elasticity of demand measures the degree of responsiveness of the quantity of good demanded due to a change in price. In the other word, a price elasticity of demand reveals the proportionate change in quantity demanded due to a given proportionate change in price.
The formula to calculate the price elasticity of demand is as follows:
Ed = Percentage Change in Quantity Demanded
Percentage Change in Price
The paper uses the price elasticity of demand of nicotine product such as tobacco or cigarette to measure a price elasticity of demand of nicotine-addicted users, versus the group of "social smokers. Analysis of the price elasticity of demand between social smokers and additive smokers reveals that if the government increases the price of tobacco in order to decline the tobacco consumption in the society, the price elasticity of demand for tobacco will be more elastic for the social smokers than addictive smokers. Essentially, nicotine addicted users will be less price sensitive because they are already addicted to tobacco smoking and it would be very difficult for them to stop smoking. On the other hand, social smokers such as…
Sources Used in Document:
Jha, P. Chaloupka, F.J. Moore, J. et al. (2006). Chapter 46 Tobacco Addiction from the book Disease Control Priorities in Developing Countries. Second edition. World Bank.
Diminishing Marginal Utility is the basis by which a good gets its value in the marketplace? As part of your answer explain the concepts of consumer's preference and consumer's surplus and how they contribute to the valuation process.
The concept of diminishing marginal utility holds that the more a consumer consumes something, the less he or she will gain in terms of his or her real and perceived value of